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Gold prices rising in anticipation of further quantitative easing

Ben Bernanke’s Jackson Hole speech has generally been interpreted to mean another round of quantitative easing (QE3) aka ‘printing money’ is coming. This would devalue the dollar, and given the inverse relationship between gold prices and currency prices, QE3 means higher gold prices.

Already, traders and investors have bought in response to the speech, sending gold prices higher in advance of any further quantitative easing.

Two weeks ago Emerging Money profiled several gold ETFs. Two of the most most popular gold-mining ETFs are the Market Vectors Gold Miners ETF (GDX, quote) and Junior Gold Miners ETF (GDXJ, quote). Since then, GDX has averaged about 11.3 million shares a day and GDXJ almost 4 million shares per day. Neither fund however, is heavily invested in emerging markets. GDX has most of its assets in Canada, though it does have a notable amount in Africa (16%) and Latin America (5%). GDXJ has very little emerging market exposure, with only 4% in Latin America and less than 1% in Asia.

Three other gold ETFs have more emerging market exposure. The PowerShares Global Gold and Precious Metals Portfolio (PSAU, quote) has more than 17% in Africa, 3.5% in Latin America and 1% in Asia. The MSCI Global Gold Miners Fund (RING, quote) has a little more in emerging markets, with 14% in Africa, about 6% in Latin America and about 3% in Asia.

The Global X Pure Gold Miners ETF (GGGG, quote) has the highest total exposure to emerging markets of the three, with 20% in Africa, approximately 3% in emerging Asia and about 3% in Latin America. As previously mentioned, these ETFs are very illiquid, with each averaging plus or minus 5,000 shares per day in the last two weeks. Given the high correlation to GDX and GDXJ, emerging market investors seeking gold-mining exposure would probably be best served by investing in those two more liquid ETFs.

GLD has been moving higher over the previous two weeks; the extreme reaction to the Federal Reserve chairman’s speech at Jackson Hole is obvious and circled in purple. This recent action has helped gold prices and the ETF move back toward their longer-term bull trend. The metal and GLD have been in a slump for a year, which had some proclaiming the end of the bull market in gold.

The three-year chart of GLD above illustrates this longer-term trend and how the recent breakout has realigned GLD for additional gains. The gold-mining ETFs have not performed as well as GLD and therefore offer potentially greater gains if gold prices continue to rise.

The 14-day chart for GDX and GDXJ shares characteristics with the 14-day chart for GLD, as the ETFs have also benefited from the recent Federal Reserve developments. The longer-term charts, however, tell a different story.

Although both ETFs are higher today than they were three years ago (albeit barely higher in the case of GDXJ), they are also well off the highs reached in the summer of 2011, when gold prices hit above $1,900 per ounce. With gold currently trading near $1,700 per ounce and expected to go higher, it is reasonable to expect GDX and GDXJ to do so as well. But because those ETFs own gold-mining companies which are subject to different variables from the GLD ETF, it is difficult to say whether they will reach those previous highs.

That being said, higher prices should be expected if gold continues to climb.